Demand from prospective house buyers fell in May as rising interest rates and the cost-of-living crisis gave potential purchasers pause for thought, according to surveyors.
The latest UK residential market survey from the Royal Institution of Chartered Surveyors (RICS) found that new buyer enquiries fell in May, with a net balance of -7%, down from a much more positive sentiment of +8% in April.
Some professionals put this down to some buyers tightening their belts as the cost-of-living has an effect, and May’s result brings to an end eight months in a row of positive results for new buyer inquiries.
RICS chief economist Simon Rubinsohn said “The increase in the cost of mortgage finance alongside growing concerns about the economic outlook is unsurprisingly having an impact, albeit a relatively modest one at this point, on buyer activity in the sales market.
“Despite this, prices are viewed as likely to remain resilient into 2023.
“But as is often the case in these circumstances, the pressure is likely to be felt more visibly in transaction levels which are seen as likely to slow as the year wears on.”
The volume of agreed sales saw little change, with the survey reporting a “flat picture”.
Sales expectations over the next three months were also predicted to be flat with a net balance of +1%, falling from the rosier picture in April when the net balance was +10%.
Looking over the next 12 months, expectations point to sales falling, with a net balance of 24% of professionals expecting falls rather than rises.
New instructions to sell homes were also largely flat during May, with RICS saying there was “little respite” for the lack of supply in the future, with respondents citing the weakest picture since December 2021 for new or requested market appraisals.
Given constrained supply, house prices have continued to rise. A net balance of 73% of professionals reported an increase in house prices during May.
All parts of the UK continue to see increasing prices, with growth exceptionally strong in Northern Ireland, Northern England and Wales.
Looking ahead, 12-month price expectations did ease at the UK level for a third successive month.
Although a net balance of +42% of survey participants still envisaged house prices being higher in a year’s time, that was down from +78% in February, and was “the most moderate reading” since January 2021.
However, RICS said 12-month price expectations remained positive across all parts of the UK.
In the lettings market meanwhile, tenant demand continues to rise firmly, RICS added.
At the same time, landlord instructions continue to decline, pointing to rising rental prices.
As a result, rental growth expectations over the next three months remained elevated, returning a net balance of +58% in May.
Rubinsohn added: “What is particularly striking in the latest RICS survey is both the current and anticipated strength in the rental market.
“New instructions of property to let continue to fall according to respondents to the survey while demand is still very strong leading to rental levels being bid higher and greater challenges for tenants who aren’t in the position to compete for the available stock.”
Reaction
Emma Cox, MD of Real Estate at Shawbrook:
“It seems likely there will be a further cooling of the strongest property price and transaction growth as the market faces sustained economic headwinds.
“However, any slowdown will still leave the market in historically robust territory. Estate agents’ stock levels remain low, and many buyers are still determined to move ahead with their purchases.
“In the lettings market, there is still strong demand from tenants for a constrained supply of high-quality rental properties. Over the coming months, rents across the UK could well be subject to further upward pressure.
“With so many complex factors weighing on the sector, lenders are continuing to support homebuyers and landlords with competitive rates and favourable LTVs. Many are looking to secure mortgage deals now, in anticipation of future Bank of England decisions.
“Supply remains one of the key themes highlighted by surveyors. Further clarity is needed from the government on how it intends to support landlords and homeowners, and particularly those looking to make energy efficiency upgrades to older stock.”
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown:
“Rocketing rents are already putting tenants under horrible pressure, and there’s every sign that the squeeze is going to intensify. Rent rises are expected to outstrip house prices over the next five years, as landlords sell up and tenant numbers boom.
“Landlords are packing up and clearing out of the market. Some feel we’ve reached the top of the market and are keen to capitalise on higher prices while they can. Others are worried about more legislation and higher taxes making renting less rewarding. In London in particular, some are moving into the Airbnb market where returns are more rewarding.
“Those landlords who are left, are in a position of real power, because the number of people looking to rent continues to rise. Rising house prices mean more people renting later in life, which in turn means tenant numbers are booming. In recent months, they’ve been joined by people who’ve sold up and are being forced to rent because they can’t find anything to buy.
“With several potential tenants chasing each home, landlords are hiking rents and being pickier about who they accept. Tenants are keen to stay put to avoid the cost of moving and higher rents elsewhere, but some are being forced out by higher rents or landlords selling up.
“It leaves renters in a horrible position. They already spend a significantly larger chunk of their income on housing costs than their home-owning counterparts, and runaway rising bills from energy to petrol and food means they can’t afford to pay more to rent their current home. More and more are being forced to move, which is horrendously expensive in itself.
“Their new homes are likely to be smaller, and there’s been a growth in people renting a single room in a larger property to cut costs. Right now, we’re not seeing a boom in sofa surfing and a return to living with parents, but the agents think this isn’t out of the question.
“Meanwhile, for buyers and sellers, property prices kept rising in May. However, there were plenty of reports of buyers taking their time and considering their purchases more carefully. As a result, more sales were falling through, and in some cases, when the property went back on the market it fetched a lower price. One agent commented that the party is nearly over.”
Steve Griffiths, sales director at The Mortgage Lender:
“While we’ve previously seen the UK housing sector defy the odds, demand is now starting to slow.
“With the rising cost of living and the Bank of England poised to raise rates further this year a slowdown is now on the cards.
“For those still keen to buy this year or re-mortgage, locking in a cheap rate will be a priority. For those where home ownership is further down the line, ensuring that current financial pressures don’t impact future aspirations will be key.
“Products like buy now pay later can seem like good deals but can often impact credit scores and lead to difficulties getting a mortgage.
“For those with blips on their credit score, there are still options available, speaking with a broker will ensure you can still find a suitable product.”
